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Single person to constitute a Company

By Kumkum Sen in New Delhi
December 07, 2009 18:01 IST
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A man is known by the company he keeps. But with the implementation of the Companies Bill 2009, a single person will constitute a Company, under the One Person Company (OPC) concept, writes Kumkum Sen.

As a structure for professionals, individual entrepreneurs, SMES and NGOs - the proposed Section 171 extends to Section 25 Companies as well - this is a godsend, as it insulates the shareholders personal assets from liability.

But one wonders whether this Bill is the right platform or the timing is opportune. There have been too many writings on the Bill and its various dimensions. It is a critical piece of reform, which will be resisted and opposed by many.

There are many issues in the mainstream Company Law that have to be addressed before the Bill itself is passed, which is a herculean task in itself.

For one the jurisdiction issue, will the aborted National Company finally get activated or will the current Company Law Board and High Court combination continue to rule.

Questions may be raised in the Parliament in view of the alleged Vasudevan fiasco. And talking of fiascos, another question being raised is why, in spite of the Satyam catastrophe, has the requirement of independent director been diluted?

To push the OPC through at this point, when the LLP regime is yet to take off is rather like putting a kitten amongst predatory pigeons.

The OPC effectively represents the antithesis of the Salomon Vs. Salomon principle and most provisions in the statutory and compliance framework of the Companies Act will not be applicable.

For one, the OPC would have very little paper work - the Articles of Association would be simple and short, and if the same person doubling as director, there would be no need for board or shareholders' meetings.

Some OPC regimes in other jurisdictions have a mandatory requirement of two directors, and therefore board meetings are necessary, though not physically as the Bill will recognise the validity of  such meetings being held by video or teleconferencing.

Quorum requirements, proxies, maintaining of various registers of members, filing of multiple e-forms fade away, leaving the single operator free from the fetters of corporate governance, except that he has to maintain his books of accounts, prepare and file annual audited balance sheet and profit and loss accounts, without the Board's report (?)

The OPC structure is prevalent in several jurisdictions, and the regulatory regime is provided within the local Companies Act, as proposed in India.

The regime has yet to be conceptualised and it's not clear whether the OPC structure will be available to foreign investors through the automatic or approval route, or whether a migration regime will be permitted for joint stock companies and partnerships.

Would an existing limited liability company be treated as a "person" for this purpose? If so, should not there be a limit capacity in terms of the corporations' net worth or capital structure.

How will the regulator ensure that the OPCs are not set up as fly by night ventures with the sole intent of liability evasion? More importantly, how strongly is the doctrine of lifting the corporate veil be enforced against OPCs because therein lies the acid test of the OPC dividing line Salomon and Salomon the individual.

The Chinese company law is a model which addresses most of these concerns. For one, the authorised capital at the time the Company is frozen and required to be fully paid at startup.

All important decisions, financial, commercial investments have to be documented and recorded.  A natural person can set up only one OPC, though strangely, similar restrictions are not imposed on corporations.

For China, OPCs are cheaper model for Foreign Investment.  Is India looking at the same?

Kumkum Sen is a Partner at Rajinder Narain & Co.

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Kumkum Sen in New Delhi
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